Gulf Oil: Declining US oil imports could push up Indian expenditure on Navy

Many readers were incredulous at my last column in The Times of India. This said that by 2020, US oil imports would dip and be met entirely from neighbours in the Americas, ending US dependence on the Persian Gulf. This would lead to substantial US military withdrawal from the Gulf.

Many readers complained they had not read about this anywhere else. So, let's get into the sources. Daniel Yergin, global oil guru, has written a new book, The Quest. Historically, says Yergin, oil moved mainly east-west. That is, oil from the Middle East and Africa travelled east or west to the US and Japan. However, new discoveries mean that by 2020, most oil transport will be north-south, from Canada and Latin America to the US.

This is simply another way of saying that traditional US dependence on the Gulf is going to disappear. Three major developments are driving this new phenomenon.

The first is the steady rise in production of oil from Canada's tar sands, which hold more oil than all Saudi Arabia's reserves. Extracting oil from tar sands is environmentally messy and has attracted much green resistance. Yet, Canadian oil sand production has risen from nothing to 1.5 million barrels per day (mbd), and could double by 2020.

The second development is the discovery of massive 'pre-salt' oilfields offshore in Brazil, making it a major exporter. Brazilian output will in a decade rise to at least 5 mbd, half today's Saudi output.

The third development is a new technology, fracking, which breaks up tight rock in shale formations and makes it economic to extract oil and gas from enormous US shale deposits historically regarded as uneconomic. The biggest shale oil development is in the Bakken shale in North Dakota, where production has touched 0.5 mbd and should double soon. This has given North Dakota the lowest unemployment rate in the US, just 3.8%.

Similar shale oil development is taking place in the Eagle Ford and Permian basins in Texas, and the giant Utica shale in Ohio and Pennsylvania. Total shale oil production should reach 3 mbd by 2020.

An analysis by Ed Crooks in the Financial Times (in edition dated November 1, 2011) points out that US oil consumption peaked at 20.7 mbd in 2007 and has since fallen because of recession and mixing ethanol in petrol. Falling consumption may continue because of tighter fuel economy standards and the rise of electric and hybrid cars. Large truck and bus fleets could conceivably switch to using cheap, abundant gas instead of liquid fuels.

Ed Morse, a former US energy diplomat, estimates that US oil imports will fall from 10 mbd today to just 3 mbd by the 2020s, a quantity the US can get from just Canada and Mexico, without even tapping Brazil or Venezuela. Oil from neighbours will be much cheaper than Gulf oil because of lower transport costs.

Most defence strategists have exaggerated notions of US dependence on Gulf oil. This year, of US imports of 10 mbd, just 1.3 mbd will come from Saudi Arabia. Other suppliers are Canada (2.6 mbd), Mexico (1.2 mbd), Venezuela (0.9 mbd), Nigeria (0.9 mbd) and minor suppliers.

Why then does the US place high strategic value on the Gulf and its oil? One reason is that the US psyche was shocked as never before when the Arab oil embargo of 1973-74 led to terrible shortages, queues and fist-fights at petrol pumps, and politicians decided this could never be repeated. A second reason is that Nato partners, above all Japan, will continue to need Gulf oil. Third, any interruption of Gulf supplies will send oil prices spiralling, whether the US imports oil from Canada or Saudi Arabia.

So, the US will retain some interest in smooth oil flows from the Gulf even if its own imports from the region fall to little or nothing. However, the US budget deficit is now a political hot potato. Rather than cut welfare entitlements, politicians would rather cut military spending, especially in areas of falling strategic importance.

Defence experts, including ex-defence secretary Robert Gates, have questioned Nato's value to the US - other members spend so little that they do not materially assist US security. The US wants to cut its own spending and placing a higher burden on Nato allies.

The US will also want major oil importers to bear a larger share of the cost of policing the waters in and out of the Gulf. Japan is currently the largest importer from the Gulf, but will soon be replaced by China, with India a distant third. Japan's constitution limits its own defence spending. So, China looks like first supplementing and then replacing US naval dominance in the Gulf.

Pakistan has begged China to use Gwadar port as a naval base, but till now China has refused. However, Gwadar would be an ideal future location for policing the Gulf, right at its entrance. Western analysts will not see a Chinese naval base at Gwadar as an anti-Indian move. Indeed, some will argue that China's policing will ensure secure oil for all importers including India.

Yet, can India be comfortable entrusting its oil security to China? Indian strategists will demand a much stronger Indian naval presence to check Chinese naval dominance. This will be politically tricky, and very expensive. It promises to be a top strategic issue in the coming decade.